Tuesday, March 19, 2013

Are You Buying What Best Buy Is Selling?

It was named “Specialty Retailer of the Decade” by Discount Store News in 2001, Company of the Year by Forbes in 2004, and as recently as 2006 was placed on the List of Most Admired Companies by Fortune. Now be honest: had the title of this article been a little more obscure, would you have guessed that Best Buy was the recipient of these honors?

Just a few years later, on March 8, 2009, following a bankruptcy filing and subsequent inability to find a buyer, Best Buy’s number one rival Circuit City closed all its stores, freeing up over $11 billion in appliance and electronics business. While some retailers were experiencing double digit sales declines between 2008 and 2010, Best Buy total revenue gained a dramatic 23.4%. Benefiting from the Circuit City liquidation, as well as its own acquisition of a 50% interest in Best Buy Europe, sales leaped from $39.9 billion to $49.7 billion. At that point it was believed by some that Best Buy had a monopoly on the electronics market. Euphoria, right?  But then Best Buy began to show definite cracks. What happened?

First of all, although Best Buy was a substantial beneficiary of those Circuit City sales dollars, it wasn’t the only one. Not only were internet retailers picking up business in this category, but Wal-Mart was gaining market share as well, expanding its electronics mix with more depth and breadth - and at higher price points. In the 24-months from the end of 2010 to the end of 2012, Best Buy revenue growth slowed to a modest 3.0% while comp store sales showed consecutive annual declines of 1.8% and 1.7%.

2013 started out no better. In March 2012, Best Buy announced that it would begin testing a prototype which was 20% smaller than stores it was currently operating, and would close 50 large format stores, including three in New England (Boston and Wareham MA, and Middletown RI). The following month, its CEO announced his abrupt resignation following an internal investigation into his “personal conduct.”  The bad news continued the following month as the chief marketing officer and chief financial officer of its international division departed. Then late last year, the head of BestBuy.com left the company, a short nine months after coming on board. Sounds like one mess after another.

However, in the midst of all this, Best Buy hired a new CEO, Hubert Joly, who was regarded as a turnaround expert, having done so with the likes of TGI Friday, Radisson Hotels, EDS, and others. Within 10 weeks, Joly announced his turnaround strategy: a multi-step plan to “Renew Blue.” Joly emphasized the need first to stabilize and then grow same-store sales and profit margins. The aim was to hit operating margins of 5-6%, which had recently been running about 2.1%. He acknowledged that Best Buy had a price perception issue, and instituted a price matching policy during the holiday season. He also discussed increasing revenue by attracting and developing “transformational leaders” to improve the customer experience both in-store and online by energizing and empowering employees to deliver “extraordinary results.”

So far Joly has been able to attract a few new key executives following the departures of several. Building on the apparent success of its holiday price-matching program, Best Buy announced that the program would go into effect permanently. This started earlier this month - and not a day too soon.

In the branded world of consumer electronics, price is the driving motivator. If Best Buy is going to compete, it has to be more than a showroom to the consumer. And with the particular hit it’s taken in electronic entertainment hardware and software sales, Best Buy needs to find ways to better allocate space toward its most profitable merchandise lines.

Joly responded recently by announcing that Best Buy would put more focus on appliances, a category that had been relegated to the back of the store as high tech took over. Joly wants appliances to have a front and center position now, a shrewd tactical move in light of the housing recovery and the potential demand that should ensue. The competitive environment in appliances is much more favorable as well. After all, how often do you shop online for a refrigerator, washer, or dryer?

Best Buy’s latest announcement is the elimination of the work-at-home program, a move that, although it surely resulted in more than a few disgruntled employees, was designed to encourage employees to focus on the tasks at hand. While it’s still too early to tell if Joly’s Best Buy plan will be effective, it appears to be moving the company in the right direction. From a strategic perspective these recent moves should be applauded; but the big question now is, will it translate to the bottom line, and regain for Best Buy at least a little of the glory it once enjoyed?

Bob Sheehan, Vice President of Research

KeyPoint Partners Company News

New Business: KeyPoint Partners has been awarded Property Management contracts for 1080 Route 28, an Ocean State Job Lot in South Yarmouth, MA and 978 Boylston Street, a CVS store in Newton, MA; and Property Management and Leasing contracts for Treble Cove Plaza, a 114,000 square foot shopping center anchored by Market Basket  in Billerica, MA; Marathon Realty awarded the contracts.

Industry News: National

US chain store comp retail sales for February rose 1.7% year-over-year as measured by the ICSC's tally of 22 major retail chains. According to the ICSC, sales were negatively impacted by adverse weather, higher payroll taxes and uncertainty surrounding the federal government’s sequestration. The ICSC is continuing to modify its reporting as more retailers, most recently Kohl’s, Target, and Macy’s, switch to quarterly sales reports. The National Retail Federation's February retail sales report shows sales excluding automobiles, gas stations and restaurants increased 0.7% seasonally adjusted from January and inched up 0.5% unadjusted year-over-year. Among individual retailers, Gap gained 3.0%, and Limited rose 3.0%; Costco was up 6.0%, and TJX rose by 1.0%. Rite Aid  was down 3.6%, and Walgreens was down 0.6%.  See retail sales results on Page 4...Casual Male Retail Group has changed its corporate name as of Feb. 25 to Destination XL Group, Inc...DSW Inc. launched its new Luxe810 e-commerce site with five pop-up stores promoting the site, selling ready-to-wear women’s and men’s designer shoes, handbags and other accessories, including a 6,200 s/f location at the Mall at Chestnut Hill (MA) and others in New York, San Francisco, Boca Raton and Washington, DC...Several months after buying discount Internet retailer Sierra Trading Post, TJX Cos. plans to use the platform launch limited TJX brands ecommerce websites.

Industry News: Accelerating

Nordstrom Inc. plans 24 new Nordstrom Rack stores this year, with more than 30 expected in 2014, and will double its Rack count from its current 119 locations to more than 230 stores over the next 4 years. Nordstrom announced two new Nordstrom Rack locations in Chicago and Jacksonville, FL..7-Eleven expects the number of 7-Eleven stores worldwide to pass the 50,000-store mark by the end of the first quarter. At year’s end, 7-Eleven operated 49,500 stores in 16 countries...In fiscal 2013, Gap plans to open about 160 company-operated stores, including 35 Athleta stores. Gap ended the year with 3,407 stores in 47 countries...Lane Bryant opened a new 7,835 s/f flagship store near Herald Square in New York City. Lane Bryant, a wholly owned subsidiary of Ascena Retail Group, operates 805 stores...Ascena Retail Group, parent of Charming Shoppes, Lane Bryant, Catherine’s, Dress Barn, Maurices, and Justice, expects to open 100 to 120 stores in the spring, and close 40 to 60...Hot Topic agreed to sell itself for about $600 million to Sycamore Partners, who last year took over Talbots. Hot Topic has more than 600 locations...Dick's Sporting Goods Inc. will debut a new retail concept under the Field & Stream banner. In 2013, the company will open two Field & Stream stores, 40 Dick’s Sporting Goods stores, one Golf Galaxy store and two True Runner locations. The chain also plans partial remodels of 75 existing Dick’s stores...Uniqlo opened its second US mall location, a 24,000 s/f store at Palisades Center in West Nyack, NY, the company’s sixth US location...Trans World Entertainment Corp., owner of the FYE music, video and electronics chain, will open about 20 stores this year, a major reversal after years of downsizing. Trans World closed more than 600 stores from 2006 to 2012 and cut thousands of jobs...Target will open three in-store health clinics in the Chicago area to open in August. Target plans to open 14 new clinics around the country, for a total of 68...Leslie's Poolmart, Inc. will open 13 new US retail locations on March 15. With these new stores and its recent acquisition of 24 Warehouse Pool Supply stores, Leslie's will bring its total store count to more than 800 locations nationwide...Aaron's, Inc. announced the recent opening of a combined 32 new company-operated and franchised stores in 17 states and two Canadian provinces. Aaron's has more than 2,075 company-operated and franchised stores in 48 states and Canada...Jo-Ann Fabric and Craft Stores will open its 800th store this month in Slidell, LA...Accessories store Lou Lou is opening its first clothing store in Washington, DC this month. Lou Lou has 10 stores, with another about to open in Charlottesville, VA...As it continues its transition from Casual Male to Destination XL, Destination XL Group expects to have between 105 and 112 DXL stores open by the end of the fiscal year, from its current 48 stores, with a goal of 215 to 230 DXL stores by 2016...Aeropostale will open approximately 14 Aeropostale stores, approximately 60 P.S. from Aeropostale stores, remodel approximately 30 stores, and close approximately 15 to 20 Aeropostale stores.

Industry News: Decelerating

Best Buy Co. is cutting 400 jobs at its headquarters as part of a cost-cutting plan...American Eagle Outfitters continues to prune its underperforming stores -- between 15 and 20 in 2013 -- and plans to open seven to 10 others. Over the next few years, American Eagle will annually close between 25 and 40 underperforming stores, open between 10 and 20 other American Eagle stores, and increase the number of American Eagle factory outlets. The company has 1,044 locations, down from 1,069 a year ago...Foot Locker will close its 22 underperforming CCS skatewear stores and focus solely on the banner's online business... Target is shuttering its “The Shops at Target” concept, which showcased exclusive goods from select independent boutique retailers within in-store shops in Target stores...The Great Atlantic & Pacific Tea Co. Inc. (A&P) has contracted to sell its real estate interests in a few non-core store locations. Since filing for Chapter 11 bankruptcy in December 2010, from which it emerged in March 2012, the Northeast regional grocer has struggled to regain its financial footing, most recently closing three underperforming Super Fresh stores in the Philadelphia area, and indicating interest in selling its upscale The Food Emporium chain. A&P operates more than 300 stores in six states under the A&P, Best Cellars, Food Basics, The Food Emporium, Pathmark, Superfresh and Waldbaum’s banners.

Industry News: New England

Foodie’s Market celebrated the grand opening last month of an 8,500 s/f store in South Boston which features traditional and gourmet groceries, as well as prepared-foods and a butcher shop...The five-screen cinema AMC Chestnut Hill Theatre on Route 9 in Newton, Mass. has closed. Norwood-based National Amusements plans to open a six-screen Cinema de Lux complex at the new Chestnut Hill Shopping Center near the same location, part of a major redevelopment at the center by WS Development which will expand the shopping center to 406,000 s/f...The founders of b.good, a burger Boston chain, will open the company’s first franchise store in Shrewsbury, and plans 23 new franchise stores, and 12 more corporate locations, in Maine, New Hampshire, Rhode Island, Connecticut, and Massachusetts over the next five years...The first of 10 planned French Fry Heaven locations in Massachusetts and New Hampshire is targeted for Saugus’ Square One Mall in June and the Natick Mall soon after. French Fry Heaven sells Belgian-style fries and sweet potato fries cooked in trans fat-free peanut oil and served in paper cones. Each location has 21 toppings...Party goods retailer iParty Corp. has entered into an agreement to be acquired by Party City Holdings Inc. The transaction is expected to close during the second quarter of 2013...City Sports plans two new stores: a 10,500 s/f bi-level, space in NYC, its largest store to date, to open at the end of March, and a new 9,200 s/f location for its Chestnut Hill, MA store, set for a March 16 opening to coincide with the brand's 30th anniversary...Restoration Hardware, now branded as RH, opened a new flagship 40,000 s/f store at 234 Berkeley St. in Boston’s Back Bay, a transformation of an historic landmark that is intended to bring a new type of retail experience to the Back Bay...Frost Ice Bar — where everything but the floor and ceiling will be made of ice — is under construction in a building near Faneuil Hall in preparation for a June opening. The 1,500 s/f bar will be a chilly 17 degrees. Customers will check into a retail area and don hooded capes and gloves before entering a 32-degree “transition room” to get acclimated to a cooler temperature...Fishing and sporting attire store Orvis will close its 6,554 s/f store at Faneuil Hall Marketplace Boston at the end of March.

February Retail Sales Report

Commerce Department Monthly Sales

Retail and food service sales increased 1.1% to a seasonally adjusted $421.40 billion, the Commerce Department said, marking the fourth straight monthly gain and biggest rise since September. The figure was up 4.6% from a year ago. Retail sales excluding gasoline rose 0.6% for the month.

Source: U.S. Department of Commerce - commerce.gov

Treasury Yields

Consumer Confidence Index

The Conference Board Consumer Confidence Index®, which had declined in January, rebounded in February. The Index now stands at 69.6 (1985=100), up from 58.4 in January. The Present Situation Index increased to 63.3 from 56.2. The Expectations Index improved to 73.8 from 59.9 last month.

Source: The Conference Board - www.conference-board.org  

Purchasing Managers Index

Manufacturing expanded in February as the PMI™ registered 54.2 percent, an increase of 1.1 percentage points when compared to January's reading of 53.1 percent. This month's reading reflects the highest PMI™ since June 2011, when the index registered 55.8 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

Source: Institute for Supply Management - Manufacturing Report on Business - www.ism.ws